Retirement accounts are commonly protected in bankruptcy, but some limitations apply. If you are considering bankruptcy, meeting with a bankruptcy attorney will affect your case to learn more about how bankruptcy rules.
Does filing for bankruptcy mean dropping your retirement funds? For most people, it does not. Most retirement accounts are protected in default, meaning they are not used to repay your debts. However, there are exemption limits on some kinds of accounts, and there may be outturns for withdrawing your retirement money before bankruptcy. Before you file, it is vital to know the details.
Are Retirement Accounts Protected in Bankruptcy?
Federal bankruptcy rules protect most retirement accounts, though some limitations apply. Additionally, state rules may determine what you are allowed to keep, so it is a correct idea to work with a bankruptcy specialist or attorney in your area familiar with all admissible federal, state, and local laws.
At the Law Offices of Ronald E. Stadtmueller, a Bankruptcy Law Specialist in San Diego, we aim to help you achieve freedom from debt and make a fresh start. Let us evaluate your current financial situation and discuss the options available so you can regain control today. Trust us, for we draw on over 30 years of experience guiding clients in California through bankruptcy. Allow our attorney to help you regain a firm financial footing. We even offer senior discounts.
Which Accounts Are not Protected?
With a separate cash exemption, investment accounts, money saved in regular savings accounts, stock option plans, brokerage accounts, or other non-retirement banks are generally protected. It may be used to pay your creditors—even if you consider the money your retirement savings.
How Is Retirement Income Treated in Bankruptcy?
If you are already retired and collecting retirement benefits, the income you receive from your retirement accounts may affect your bankruptcy. Here’s how:
Chapter 7
In filing for Chapter 7, bankruptcy, or liquidation, you must have below-median level income for your state or pass a means test to demonstrate that you cannot repay your debts. The test considers assets, income, unsecured debt, and expenses. Monthly retirement benefits from a pension or retirement account may be used to determine income as part of the Chapter 7 means test. Retirement benefits that are considered above and beyond what’s needed for your support may be used to repay your creditors.
Chapter 13
In a Chapter 13 bankruptcy, your income aids in determining how your debts will be repaid. The goal in Chapter 13 is to reorganize your debt, preserve many of your significant assets and repay at least some of what you owe over three to five years. Retirement benefits may factor into your income calculation, possibly increasing the debt you will be expected to pay back.
Social Security
Social Security benefits are exempt if you keep Social Security payments separate from the rest of your money. Do not deposit your Social Security checks or payments into a checking account you also fund with other income. Use a separate bank account for Social Security benefits.
Protect Your Retirement Funds in Bankruptcy
Before you file for bankruptcy, consider meeting with a bankruptcy attorney. They can help you navigate federal, state, and local bankruptcy rules to protect your retirement assets best and ensure your retirement income, including Social Security, is adequately reported. They can also help you think through alternatives to bankruptcy if they might be appropriate for you.
An additional note: Taking money out of a retirement account to pay down debt is an excellent way to postpone or reduce the impact of bankruptcy. But explore your options with an attorney first.
Withdrawals from tax-deferred retirement accounts are taxable as regular income. If you are younger than 59½, you may also pay a 10% early withdrawal penalty. Moreover, once withdrawn, your retirement funds are no longer protected in bankruptcy and may prevent you from passing a Chapter 7 means test or inflate your income in Chapter 13. Before taking this step, determine whether filing for bankruptcy is a better next step for you.
Final Words Considering how bankruptcy might affect our retirement savings and income is important. While there are protections in both Chapter 7 and Chapter 13 bankruptcies to help us keep our retirement accounts from being seized to repay creditors, income from retirement benefits may be used to help determine our ability to repay debts. Nonqualified accounts may not be protected in bankruptcy, and rules may differ depending on your state. Consulting with an attorney may help us keep our assets while navigating all applicable rules.
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